With the coalition managing to win the election by the narrowest of margins, finance professionals now have to more carefully look at the superannuation changes outlined in the 2016 federal budget.
On balance, the changes to superannuation, except for one notable retrospective policy; will result in a fairer, possibly more sustainable, and a more equitable system. In addition the changes present some new strategic opportunities for financial professionals, but these come with a responsibility.
The retrospective policy is the new $500,000 lifetime limit on non-concessional super contributions, with contributions made since July 1, 2007 being counted. If this policy is allowed to proceed in its current form it will be the first retrospective change to superannuation.
There are a number of industry insiders that believe if this policy becomes law it will provide a precedent for future governments to pass other retrospective changes. It is for this reason that financial professionals should be writing to their local federal member, and also encouraging their clients to do the same, to try and make sure the $500,000 lifetime limit will apply to non concessional contributions made from budget night.
Another 2016 budget superannuation change that requires advisers to take action is the removal of the exemption from tax on income earned on Transition To Retirement (TTR) pension accounts. Having clients commence TTR pensions has been a popular strategy that has been most effective for clients that are 60 or older, and less effective for those under 60.
With the removal of the exemption of tax payable on income earned on TTR pension accounts, advisers should review their clients currently receiving these pensions. After taking into account the loss of the tax exemption, many clients that are under 60 may be worse off by continuing with a TTR.
Opportunity to maximise contributions
The interesting dilemma for less professional financial planners, that recommended their clients go into TTR pensions before the Future of Financial Advice (FoFA) changes, will be their willingness to recommend that clients cease their current TTR pension and roll back into accumulation.
One of the first strategic planning opportunities coming out of the super changes is the reduction in the maximum concessional super contribution limits. The two current concessional contribution limits of $30,000 and $35,000 will reduce to $25,000 if this policy becomes legislation.
Because the reduction in the contribution limit will apply from July 1, 2017, clients that have been reluctant to maximise their super contributions should be contacted to let them know of the opportunity of maximising the contributions for the 2017 year.
Of the other changes, the $1.6 million limit on amounts held in superannuation pension accounts at June 30, 2017, and amounts rolled into super pension accounts after that date, provide the opportunity for a number of strategies that will assist clients.
The other changes in the budget that will assist in formulating strategies to assist clients include:
- the ability to carry forward unused concessional contribution limit of $25,000 for five consecutive years for people with superannuation balances of less than $500,000
- the removal of the work test for super contributions for people aged between 64 and 75
- the removal of the tests relating to making a tax-deductible self-employed super contribution, and
- raising the income threshold for access to the low income spouse superannuation tax offset from $10,800-$37,000.
Some of the strategies that could become more popular are: splitting superannuation contributions with a spouse: making concessional super contributions for low income spouses that are effectively not taxed because of the low income superannuation tax offset: making deductible personal concessional contributions and non-concessional contributions for people who are over 64; and using segregation of super assets between accumulation and pension accounts for high net worth clients.
